The covert-rapid-eye-movement (REM) sleep hypothesis of dreaming suggests that elements of REM sleep emerge during sleep onset, leading to vivid hypnagogic imagery. Based on parahippocampal electrocorticography of epileptic patients we found an increase in REM-like 1.5-3.0 Hz parahippocampal activity during wake-sleep transition, which peaks after on average 30s of sleep onset, and reaches 82% of REM sleep value. The increase in 1.5-3.0 Hz parahippocampal activity followed alpha dropout, but did not relate to short-term fluctuations in alpha waves or sleep spindles. Non-REM sleep-specific slow (<1.25 Hz) activity showed a continuous increase during wake-sleep transition in both temporal scalp and parahippocampal recordings. It is suggested that REM-like parahippocampal rhythmic slow activity is an after-effect of hypothalamic wake-promoting centers' switch-off at sleep onset, leading to an inhibited hippocampal functioning and hypnagogic hallucinations.